The effects of global steel production growth on dry bulk freight

Two weeks ago we argued that the general trend of increasing dry bulk earnings since February 2016 is related to an improving growth rate i global industrial production. The trend in global steel production mirrors that of the global industrial production.Below we take a closer look at how this growth is distributed between different regions and how freight is affected.

Global steel production

Global steel production in the first 10 months of 2016 is unchanged from last year according to data from Worldsteel. However, if we break this year’s steel production into 3 periods, a clear trend of accelerating steel production emerges. The year started on a very weak note with production in January and February down almost 5% Year on Year (YoY). In the second period between March and June steel production was more or less on par with last year. Thereafter global steel production has been growing at an accelerating pace, from +1.5% YoY in July to +3.3% YoY in October. Given the current trajectory we will not be surprised if global steel production posts new all-time highs for the months of November and December.

China

As China produces more than half of the global steel output it is not surprising that the largest absolute increase in steel production in recent months has occurred in China. Chinas steel production between July and October is up close to 9 million tonnes (Mt) from the same period last year, corresponding to a 3% YoY increase.

In the last couple of months, the demand for steel in China has been strong, and Chinese real steel consumption growth has exceeded the steel production growth. This, together with increasing trade barriers has led to lower Chinese steel export.

The rest of the world

It’s not only Chinese steel production that has been growing lately. Between July and October 2016 steel production in the rest of the world is up 3.3Mt from the same period in 2015. The largest growth, both in absolute and percentage terms has occurred in India. Industrial production in India is growing at a rapid pace with a PMI in October of more than 54. Combined with less steel imports from China their steel production in the July to October period is up close to 3Mt, which is up 10% YoY.

The smaller steel production regions which we have grouped as “Other” is also growing their steel production at rapid pace. Collectively the production within this group is up 8% in the July to October period. Europe, Japan and South Korea has all managed to post a small positive growth in steel production in the same period. All these countries have benefitted from lower steel import from China. The C.I.S. has a small decrease in their steel production while South America and North America are the laggards with a negative growth of 7% and 3% respectively.

So what are the effects on freight from higher global steel production?

A growth in global steel production is positive for dry bulk demand and freight as it directly increases the demand for iron ore, coking coal, scrap and other minor ores that is used to produce different grades of steel.

… and lower Chinese steel export?

Lower Chinese steel export is everything else equal negative for the Supramax and Handysize segments as these are the preferred carriers of steel products. However, the net effect on the larger sizes is more debatable. China has adequate resources of coking coal and their import of coking coal is thus relatively small compared to size of their steel production. If the countries who now import less steel from China to a larger extent rely on coking coal import, then the global trade of coking coal will increase. This will be a positive factor for the larger sizes who are the preferred carriers of coal. At the same time, China heavily rely on iron ore imports and that might not be the case in the same degree for those countries who now are able to increase their own steel production.

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